New research from Chicago Booth finds that people perceive more benefits from their purchases if they make payments on a periodic basis. Merchants and charities alike understand that advertising their product for “just pennies a day” is an effective way to convince consumers to make a purchase.
New research from the University of Chicago Booth School of Business finds that frequent payments can also make consumers feel better about the benefits they are receiving from their purchase.
In the study, “Periodic Pricing and Perceived Contract Benefits,” forthcoming in the Journal of Consumer Research, Chicago Booth Associate Professor Daniel Bartels and University of Rhode Island’s Stephen Atlas find that the payment frequency of a contract affects how consumers imagine the benefits they would receive over time. In sum, periodic prices – dividing the purchase price into daily payments instead of one yearly payment – can increase perceived benefits.
The researchers also find evidence that consumers respond positively to per-day pricing even for costly goods, such as automobiles and meal delivery subscription services. The finding contrasts longstanding views that marketers should never subdivide an expensive product into a collection of payments.
To examine how periodic pricing influences purchase decisions, the researchers conducted nine experiments. The studies asked participants to consider either a daily cost or a yearly cost of items including charitable donations, newspaper subscriptions, music streaming services, car leases, and meal deliveries.
In one study, participants were given a scenario in which they could lease a luxury car for the periodic price of $20 a day or the aggregate price of $7,250 a year. The participants were not only more likely to agree to the lease when presented with the periodic price, but they also reported greater perceived benefits.
In another study, the researchers found periodic pricing produced a 77 percent increase in sales for a meal delivery service.
“Our framework and results suggest that periodic pricing can help people appreciate the benefits they accrue from a purchase,” the researchers said in the paper. “So, under the right conditions, marketers can encourage purchase with periodic pricing, even for significant sums of money.”
Source: University of Chicago Booth School of Business